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California tax breaks: A game changer?

Budget woes in other states could shift production landscape

Did you feel the shaking?

A genuine California earthquake rocked the film and TV production world last week, with the Golden State finally offering a competitive package of tax breaks for in-state shoots. The question now is whether the move will signal a seismic shift in the incentives landscape, especially at a time when budget turmoil in such places as New York and Florida have left industry players wondering whether their lucrative perks will be renewed.

"My phone has not stopped ringing," says Amy Lemisch of the California Film Commission. "People who are in the midst of deciding where they are going to shoot, and have places like Michigan and New Mexico on their list, are stopping in their tracks. This is exactly what we wanted to happen. You will see an almost immediate increase in shooting in the state."

After years of sitting on the sidelines as productions fled to greener locales, the California plan passed by its legislature Feb. 19 as part of the state budget will allow studio films produced for $75 million or less to apply for a 20% credit (25% for indie productions $10 million and under). Three-quarters of the shooting days or three-quarters of the production budget must remain in the state to qualify.

The credits could shave as much as $8 million-$10 million from the budget of a typical $75 million film for which about 50%-60% of the production budget is earmarked for below-the-line costs. That's not as generous as such states as Illinois or Louisiana, but even film officials there admit the new plan is enough to put California in the game.

(It's unclear whether California is putting a ceiling on the amount per movie it will reimburse.)

"I do think that California has made a good step forward at keeping work within the state," says Betsy Steinberg, managing director of the state film office in Illinois, which recently enacted a 30% incentive.

"It will affect us a little bit, but there is so much work out there."

More importantly, the move already is causing Hollywood producers to re-evaluate where to shoot upcoming projects.

"It depends on the look and tone of the film, but California definitely becomes a consideration," says producer Andrew Panay, who made the Dane Cook comedy "Employee of the Month" in New Mexico and shot Disney's "Old Dogs" in Connecticut and New York.

Adds Tucker Tooley, Relativity Media's production president: "It's not on par with some of the other state incentives in terms of percentage, but the California credit does have the advantage in that the majority of talent lives in L.A. and we have an amazing crew base, so that makes it more competitive. We look at it as a good start."

Panay says the new plan will be a boon for comedies, whose budgets tend to be below the $75 million threshold.

"Now, for studios who are making these lists of where to shoot, California will be a real option," agrees Chris Bender of production-management outfit Benderspink, who worked on "The Ruins" in Australia and "Just Friends" in Winnipeg.

At the same time, some states quietly are concerned about whether their legislatures can continue to compete in what has become an incentive arms race at a time of budget cuts and new competition from Hollywood's backyard.

A few weeks ago, New York legislators said that funds for its 30% film and TV tax incentive, approved to run through 2013, have been used up. Grappling with billions in deficits, Gov. David Paterson has put forth a budget proposal without new funding.

The New York Production Alliance has been pressing Albany to get new funding into the budget outlines expected shortly from the state assembly and senate. NYPA executive director John Johnston says the alliance will visit the state capital again next week to press its case.

Among the New York players' arguments is an Ernst & Young report that found that for 2007, the program created and retained 7,031 industry jobs in New York, or 19,512 when including other sectors. The study found that film credits amounting to $184 million for the year led to added state taxes of $209 million.

For 2004-10, the study predicted $2 billion in added revenue from incentive-related economic activity in the state.

"It's by far the most successful economic development program for New York State," says Douglas Steiner, chairman of Steiner Studios, who played a key part in getting the tax program launched in 2004.

Whatever happens in Albany, New York City officials say the city's separate 5% tax credit remains in place and funded for now. "In light of the current fiscal problems facing the city and state, we are carefully examining how we can improve the program," New York City film commissioner Katherine Oliver says.

In Florida, some fear that the legislature will not set aside money for film and TV productions given financial pressures and the state's requirement to keep a balanced budget.

For the current fiscal year, Florida provided $5 million, down from $25 million a year earlier and $20 million the year before that. Incentives came in the form of cash rebates worth up to 20% of production budgets, and a handful of films received funding.

"It's general economic worry," says Suzy Spang, chair of the Florida Film and Entertainment Advisory Council. "Florida schools are suffering, so are health care and roads. It's hard for people to see the entertainment industry as a recovery tool."

California's decision to launch production incentives will be one useful argument.

"We have started to leverage that," Spang says. She also cites an analysis by the UWF Haas Center for Business Research, which found that for every dollar spent on a production within Florida in 2007, the state saw an additional 95 cents in economic impact.

Canada also is responding to the California move. Ontario has made its foreign and domestic film tax credits permanent. But while the province last year raised its tax credit for foreign producers from 18% to 25%, it's the lower Canadian dollar that seems to be making the numbers work for the Hollywood studios.

Already, Warner Bros. TV has taken its Fox hit "Fringe" and $4 million-an-episode budget from New York to Vancouver. (Ironically, the Big Apple stole the show from Toronto with its incentives.)

Filmport also is in the running to host David Cronenberg's "The Matarese Circle," an MGM thriller starring Tom Cruise and Denzel Washington. No decision has been made, but Cronenberg is keen on making the movie in his hometown, though other forces are in play.

Competing states are quick to point out that California's plan does have its limits. The cap on tax incentives is set at $100 million a year, and demand is expected to be so high that the credits could be gobbled up very early in a fiscal year. By contrast, such states as Louisiana, New Mexico and Illinois don't have caps.

"You will likely see a race to the finish line early on" as productions compete for the limited incentives, entertainment lawyer Alan Schwartz says.